Withdrawing a non-deductible traditional IRA contribution
I inadvertently contributed too much money to my 2011 traditional IRA, creating a situation where I have a $1400 non-deductible contribution.
I made a $2000 contribution designated for the 2011 tax year to my traditional IRA on 4/5/12, with the desire to reduce my taxable income just enough so I would receive a small refund for 2011 from the IRS.
After completing my 2011 tax return (not yet filed) on 4/7/12, I realized I was only eligible to deduct $600 of that contribution – which was still enough to receive a small refund from the IRS for 2011, fortunately.
The tax software I’m using originally led me to believe that I had made a $1400 excess contribution. In a panic, and not wanting to eventually be taxed on that $1400 regardless, I went into my local Scottrade office on 4/8/12 and arranged for them to distribute the $1400 back to me before the 2011 tax deadline. The check was dated and sent on 4/16/12 and marked as a normal distribution.
I’ve been terribly confused ever since about the tax consequences of all this, and have yet to file my 2011 return until I can fully figure it out. Since I’m getting a small refund, I believe I have some extra time to file – and want to get it right.
I called the IRS for advice and received little to no help. I was given a case ID and a promise to call back – and to date have not heard back from them.
After doing my own research, I now realize it might have been safer to recharacterize that non-deductible $1400 as a 2011 Roth IRA contribution, but Scottrade says that since the check has already gone out, it’s too late to do that (even though I haven’t cashed the check yet). Scottrade says I could just roll the $1400 over into a 2012 Roth, but I’m a bit wary that this will still trigger a tax on the $1400 distribution.
I’m now very discouraged and spooked that I might end up getting dinged 25% (my bracket) on that $1400 due to a very simple mistake that I’m sure happens quite often.
My only hope is the following line from page 30 of IRS Form 590: “If you made IRA contributions in 2011, you can withdraw them tax free by the due date of your return.”
I hope this is the case, and if so, believe I meet the criteria to not be dinged 25% of $1400. But I have yet to find the IRS forms or any other info pertaining to this situation so I can run the numbers and be sure.
Am I on the right track here? What (if any) options do I have to avoid losing hundreds and hundreds of dollars due to an honest, simple mistake?
Permalink Submitted by Alan Spross on Fri, 2012-06-01 23:33
I hope you requested Scottrade to return 1,400 of your specific 2011 contribution rather than just 1,400 of your overall balance, as that is the difference between a taxable distribution and just the withdrawal of the non deductible portion of your 2011 contribution. You need to confirm this ASAP.
Note that when a specific contribution is returned, the IRA custodian must calculate any earnings or loss that occurs in the account that your contribution was in during the time the contribution was in the account. In your case this was only a few days, but the fact that you received the exact 1,400 amount is the part that makes me wonder if they processed this as a specific return of contribution. If you get confirmation that this was processed as a return of your 2011 contribution, then you can file your return showing just the deductible portion of 600, but you should also include an explanatory statement that you requested a return of contribution for 1,400 of your 2,000 contribution.
You would then not have to worry about being taxed on the 1,400, even though that would be for 2012 and not for 2011.
It also sounds like you did not file your return OR file an extension, and that makes the due date of 4/18 the final day to correct the contribution if it was done wrong. You don’t get to use the extended due date of 10/15 unless you either filed a return or an extension on time. What this means is that if Scottrade misinterpreted your request for a corrective distribution, you cannot correct it now and would have to lean on Scottrade to amend the original transaction coding. The code on the 1099R is different for a corrective distribution than a normal distribution. You would have to make sure the coding was correct next January when you receive the 1099R for the 1,400 distribution, ie that the coding agrees with your explanatory statement referred to above.
If you are confused by this response, please advise.
Permalink Submitted by Cary P on Sat, 2012-06-02 01:06
Thanks for the reply.
Scottrade actually cut me a check for 1403.90, but I will follow up with them to confirm that they processed and coded this transaction correctly.
It’s a bit of a mess, as I originally filled out a form for a return of excess contribution, but let them know shortly thereafter that I was mistaken about that due to the language in the tax software I used. My account activity shows “CORR BACK TO PREM DIST 4/16”, but not sure what that means.
So, I should ask Scottrade to confirm that the original transaction is coded as a return of a specific 2011 contribution? And this coding needs to show as such on the 1099R I receive next January?
I’m feeling a little better – thanks so much for your help. I will be very careful and likely avoid ANY traditional IRA transactions going forward.
Permalink Submitted by Alan Spross on Sat, 2012-06-02 02:31
The fact that you actually received a different amount, ie 1403.90 means that the distribution will be coded the way you want, otherwise they would have just distributed 1400 even. However, that extra $4 rounded will be taxable on your 2012 return since it is IRA income. It is taxable in 2012 rather than 2011 because you made the initial 2011 contribution IN 2012.
So you can now proceed to file your 2011 return with the deduction of $600 for your TIRA contribution and rest assured that 1400 of your check will not be taxable, just the $4 of earnings and that will be in 2012. You should still check the 1099R next January – it should have a code of 8 in Box 7 and also code 1 if you are under 59.5.
There is no need to avoid future TIRA transactions. Your income is in the phaseout range and that makes things tricky. If this happens in 2012, you can recharacterize the non deductible amount as a Roth IRA contribution or just have it returned like you did this year. You can also wait until your tax software tells you how much of deduction you can get and then just contribute that amount only.
Permalink Submitted by Cary P on Mon, 2012-06-04 19:37
Thanks again,
I’m waiting to hear back from Scottrade, but now I have the specific coding information I need to discuss with them.
I will be a little apprehensive come tax time for 2012, but at least now I can proceed with filing my 2011 return and get my refund!
Might it still be a good idea to roll that $1400 into my Roth IRA for 2012 – just in case? I have until June 16th, I believe – so need to get that going right away.
2011 is the first year I was affected by the phase-out rules, which I guess is a good thing overall – but it caught me by surprise. I’ve always kept my finances relatively simple and usually have an easy time handling my taxes myself – so this has been a real education in the complexities of the tax code. Now that I’m more familiar with the IRA rules, I won’t rule out adding to my traditional IRA – but think I will be more comfortable selectively contributing to my Roth and upping my 401K contributions at work another percentage point or two going forward.
Permalink Submitted by Alan Spross on Mon, 2012-06-04 20:18
You cannot do a rollover of a corrective distribution. But you could have recharacterized the 1400 as a Roth contribution for 2011 had you requested that instead of the corrective distribution.
However, you can use the funds that were distributed to you to make a NEW 2012 Roth contribution if you wish. Since that would not be a rollover you do not have a 60 day time limit to meet.